Government banks on RBA growth boost

Treasurer Chris Bowen said he was working with the RBA to boost jobs, but wouldn’t shirk tough decisions. Photo Dominic Lorrimer

Jacob Greber Economics correspondent

The Rudd government is subtly leaning on the Reserve Bank of Australia, which meets next week on whether to cut record low interest rates, after signalling it will deliver tough budget cuts that economists warn will drag on growth.

Treasurer Chris Bowen emerged from a meeting of the government’s budget razor gang on July 29 to emphasise Labor would be “working with the Reserve Bank” to boost jobs and growth in the economy, without shying away from “tough decisions”.

While the government is careful to emphasise the Reserve Bank’s independence, the comments send a signal that Canberra is looking to the central bank for assistance to help prevent the economy from slowing further.

Reserve Bank board member John Edwards, in Monday’s Australian Financial Review, warned the government against making big budget changes because of the economy’s vulnerability. A report by Deloitte Access Economics said the value of Australia’s biggest resources investment projects dropped for a second straight quarter – the first sustained fall in a decade.

The Deloitte survey, of almost 950 resources projects worth $20 million or more, found the value of those projects fell 5.6 per cent in the June quarter to $877 billion. Deloitte says projects already under construction or about to start edged up 3.7 per cent, but the value of projects in the planning stages dropped 14.3 per cent amid rising costs and falling commodity prices.

“The past few months could be seen as somewhat of a turning point for the Australian economy,” Deloitte said.

Resource construction at its apex

The report concludes that the peak in resources construction – which has turbo-charged the economy over the past ten years – is likely to occur this financial year, after which it will detract from growth.

The Reserve Bank, which declined to comment for this article, has repeatedly signalled that its decision to cut the official cash rate to a record low 2.75 per cent in May was aimed at spurring non-resources sectors of the economy and at bringing the dollar down.

However, economists including Dr Edwards warn further budget spending cuts or tax hikes could hurt growth – just as evidence mounts that the economy has weakened.

The government is finalising an economic statement for release on Thursday or Friday that will disclose a revenue shortfall of several billion dollars caused by falling commodity prices. Assistant Treasurer David Bradbury insisted on Monday that Labor would “continue to chart a pathway back to surplus”.

“Mr Edwards is entitled to his views; obviously he’s someone who is a key part of the deliberations of the Reserve Bank,” he told ABC NewsRadio.

Strong chance of rate cut

JPMorgan Australia chief economist Stephen Walters said financial markets were pricing in a 75-80 per cent chance of a Reserve Bank rate cut next Tuesday.

“They’ve said if there’s a case to go – during an election campaign – they’ll go, and so they should,” said Mr Walters. “They shouldn’t be second-guessing fiscal announcements or election dates. It should be totally independent of that.”

Mr Walters said the budget’s current trajectory – as outlined in May – was likely to have a neutral impact on growth. “If they’re going to have to make further cuts, the burden on either monetary policy or the currency gets larger,”Mr Walters said.

“If they start trying to plug that hole, cutting more deeply into the spending side, that’s a real drag on the economy.

“The key question is whether the RBA thinks there’s enough policy stimulus in the pipeline already and whether the significant fall in the currency is enough.”